There are early signs that China's appetite for overseas oil, copper, aluminium, iron ore and coal will recover in the second half of 2011, having been dogged for much of the first half by the government's campaign to put the brakes on growth and inflation.

Higher seasonal demand, shrinking stockpiles and a narrowing arbitrage between domestic and LME prices indicate that China's copper demand may be turning a corner, even if Beijing doesn't relax its tightening stance.

The country's power shortages, expected to be the worst in seven years, could also be a boon for imports of refined aluminium as domestic smelters are forced to shut, while coal and oil would also benefit.

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This means current prices of some of these key commodities could be seen as a bargain in a couple of months.

"Industry cross-checks show that there has been significant destocking for copper and others such as iron ore and coal," said Andrew Driscoll, a Hong Kong-based commodities analyst at CLSA. "Should inflation be reined in, which we expect it would be, then we should see restocking activity fed by a recovery in imports in around the third quarter."

The retreat in commodities prices this month, which saw oil and copper as much as 17.6 per cent and 16.5 per cent respectively below their peaks for the year, came on the back of growing fears of weaker economic growth.

Soft economic data from China, the main contributor to world demand growth for the past two years, also added to the panic as some investors began to worry about a "hard landing".

But many leading banks, including HSBC and Standard Chartered, say such fears are exaggerated, as recent output data suggest China's gross domestic product was still growing at a 9 per cent clip, while waning inflation would give Beijing room to prop up growth if needed.

Copper imports in China, the world's second-largest producer after Chile, slumped 21 per cent from a year ago to 596,000 tonnes in the first quarter and tumbled another 48.3 per cent in April as the arbitrage window for profitable imports was closed.

But that long-awaited arbitrage may finally re-emerge after the comparative price levels briefly flirted with break-even levels for imports earlier this month and copper futures traded on the Shanghai bourse moved into a backwardation.

"At the very least, destocking has run its course, and consumers' hand-to-mouth buying is eating into broader domestic inventories," Nicholas Snowdown, an analyst at Barclays Capital, said.

He pointed to a sustained decline in inventories at bonded and unbonded warehouses and rising premiums for copper cathodes to around $US60 a tonne, from close to nil at the start of the year.

Copper stocks in warehouses monitored by the Shanghai Futures Exchange fell for ten straight weeks on May 27 to a 21-month low of 82,309 tonnes. Total stocks have dropped 54 per cent from the peak of 177,365 tonnes recorded in March.

"The implication is that we are approaching a pivot point where the flow of material into surrounding LME Asian warehouses will ultimately reverse," he said on Sunday.

An easing of the country's monetary tightening policy, which some leading banks expect to happen in the summer, would also further boost imports, said Fu Bin, an analyst at Jinrui Futures.

Since Beijing made fighting inflation a priority in October, it has raised rates four times and raised reserve requirements on eight occasions, locking up bank deposits that would otherwise have been lent.

But easing inflation, moderating industrial activity and growing cries of a severe margins squeeze from small-and-medium enterprises could soon herald an end to the tightening cycle.

Similarly for the oil markets, where China is the world's second-largest consumer, refiners may be forced to return to the market en masse as new refining capacity comes online.

JPMorgan's oil analyst Lawrence Eagles said an end was in sight to China's crude oil de-stocking, arguing that the incentive for Chinese refiners to rebuild supplies emerges when Brent crude dips below $US110 a barrel, as that price level is enough for them to lock in positive margin.

This afternoon the price of Brent crude was at $US114.95 a barrel, down from a peak above $US127 last month.

The current power crisis is also poised to hike oil, diesel and coal imports in the coming months, as happened in 2004 and late 2010, when similar power shortages prompted manufacturers across the country to turn to diesel-fueled generators.

Power deficits in the 26 provinces and regions serviced by the State Grid Corp of China will total at least 30 gigawatt this summer, and could increase to 40 GW if coal and water stocks drop lower than expected.

China made a painful choice of raising power prices for industrial, commercial and agricultural users in some regions by about 3 per cent in an attempt to prevent the power crisis from spiralling out of control, a move which could cause domestic coal prices to rise.

China's domestic coal prices have already climbed about 10 per cent since March to its highest in more than two years, as a severe drought in central China has pressured state-owned thermal plants to scramble for more supplies to crank up generation.

"There's no doubt we will see a lot more (coal) imports going into China in the coming months and for volumes to exceed last year's average to reach around 15 million tonnes," said a Singapore-based trader.

"The recovery in imports for a range of commodities in the second half should accelerate and extend through 2012," said Peter Hickson, a commodities strategist at UBS.

"We're in the first-year of the 12th five-year plan and there's going to be a lot of big spending on infrastructure and hard assets towards the end of the year that will boost demand for a lot of commodities."

How many overpaid Wall Street analysts does it take to calculate the Chicago PMI and still get it wrong by orders of magnitude? The answer is "too many to count." One look at the PMI debunks any hype about any economic recovery here in the US that you see spewed on CNBS or any other main stream media outlet. In fact, the data (if accurate and not downwardly revised next month, a la BLS) shows business activity (rather, business inactivity) dropped the most since Lehman Brother imploded and the second most in 30 years, coming in at 56.6 on expectations (by those overpaid anal cysts analysts) of 62.0. Not even close. You didn't really think the triple catastrophes in Japan were bullish, right? Oh, never mind - you better not answer that.

Moving on to more bull... bullish economic data, the Case Shiller S&P 20 city housing index came in at - drum roll please - negative 3.61%, putting home prices at levels not seen since 2002. In other words, a flood of people just went underwater with their mortgages and have joined the list of millions of Americans/Canadians/Europeans who will be paying more for a home than it is worth - with no end in sight. This Christmas, the new theme song will be "Jingle Keys."

Want more? How about the latest data from the SNAP program which shows now a record 44 million Americans are on the food stamp program. This write up from the Burning Platform is a nice cheery piece on the situation. Of course all of this is bullish for the stock markets as they rally today on nothing but a little optimism that Greece, a nation with a GDP the size of one county in California is getting another bailout. At the same time, the United Nations has issued a warning that the end of the US dollar is coming. Nothing like the decimation of your currency to get the markets into a rally. Did you check out the latest price of Toll Brothers stock? Do it just for a good solid laugh.

Alas, all of this comes as record insider stock sales occur on a weekly basis and record bonuses are issued to the very bankers that sparked this mess to begin with. Yet, none of that really matters when you consider that Fukushima is spiraling out of control. Soil samples taken far from the plant show levels of radiation skyrocketing. Worse than Chernobyl? On the orders of magnitude worse.

Equity futures are up substantially this morning, clearly breaking up and out of the May downtrend. The dollar is lower, the Euro higher, bonds are lower, oil is breaking out higher (>$103), gold is flat, silver is higher, and food commodities are mixed with wheat lower and corn higher.

Stocks are breaking out higher on what (as if we didn’t know)? Downgrades in Europe? Goldman lowering forecasted U.S. growth? No, no, yet another supposed “bailout” of Greece part XVII… just another sad Greek Tragedy. This tragedy is a total repeat of history, the people failing to remove the shyster money changers.

But for U.S. futures to zoom wildly can only happen because there is an excess of hot money. The total supply of the three money forms is simply too much and it has allowed the money changers to capture politics, the markets, and the productive efforts of the world.

While their assets are soaring in manipulated value, your “assets” are falling in value. The Case-Shiller Home Price Data just came in for the end of Q1 (March) and home prices not only sank during March, and year over year, but they hit the lowest point of the crisis so far. Here’s Econspin:

HighlightsNo relief in sight for falling home prices is the unfortunate conclusion drawn by the S&P Case-Shiller report which says its latest data confirm a double dip for the housing sector. The Case-Shiller adjusted composite 10 index is down 0.1 percent for March and down 0.2 percent for the composite 20. Despite the report's commentary, these readings aren't that bad as the rates of decline are less than prior months and given that the readings are three-month averages suggesting that the March data may actually show a small gain. But the year-on-year rates are showing deterioration, at minus 2.8 percent for the 10 index and minus 3.5 percent for the 20.

The unadjusted readings, which are given preferred attention by the report, also show easing rates of decline, at minus 0.6 percent for the 10 index and minus 0.8 percent for the 20. These readings were minus one percent and worse in prior months. The unadjusted year-on-year rates are very close to the adjusted data.

The breadth of decline is a big negative in the report with 18 of 20 cities showing unadjusted month-to-month declines, which however again are three-month averages. The report's national quarterly reading is at minus 4.2 percent in the first quarter vs minus 3.6 percent in the fourth quarter. This reading is at a new low for the cycle and is back to the mid-2002 level.

Remember all the people who said that housing had bottomed some time ago? Well, they were wrong again, all the while I’ve been pointing to the impossible math and the number of Option-Arm resets that peak later this year. Data since March also shows that prices are continuing to fall.

The Chicago PMI and “Consumer” Confidence come out later this morning and will be reported inside of today’s Daily Thread.

Following the waves, this breakout higher in the markets probably signifies the start of the 5th wave up (e). It may go on to produce new highs, but fifth waves can truncate or extend. From my perspective its simply the devaluing of our money and manipulation, actions that lead to nowhere good for those who are caught in the squeeze.

With a bit of self-belief, Australia could become a model nation

May 26th 2011 | from the print edition

IMAGINE a country of about 25m people, democratic, tolerant, welcoming to immigrants, socially harmonious, politically stable and economically successful; good beaches too. It sounds like California 30 years ago, but it is not: it is Australia today. Yet Australia could become a sort of California—and perhaps a still more successful version of the Golden State.

It already has a successful economy, which unlike California’s has avoided recession since 1991, and a political system that generally serves it well. It is benefiting from a resources bonanza that brings it quantities of money for doing no more than scraping up minerals and shipping them to Asia. It is the most pleasant rich country to live in, reports a survey this week by the OECD. And, since Asia’s appetite for iron ore, coal, natural gas and mutton shows no signs of abating, the bonanza seems set to continue for a while, even if it is downgraded to some lesser form of boom (see article). However, as our special report in this issue makes clear, the country’s economic success owes much less to recent windfalls than to policies applied over the 20 years before 2003. Textbook economics and sound management have truly worked wonders.

A flash in the pan?

Australians must now decide what sort of country they want their children to live in. They can enjoy their prosperity, squander what they do not consume and wait to see what the future brings; or they can actively set about creating the sort of society that other nations envy and want to emulate. California, for many people still the state of the future, may hold some lessons. Its history also includes a gold rush, an energy boom and the development of a thriving farm sector. It went on to reap the economic benefits of an excellent higher-education system and the knowledge industries this spawned. If Australia is to fulfil its promise, it too will have to unlock the full potential of its citizens’ brain power.

Australia cannot, of course, do exactly what California did (eg, create an aerospace industry and send the bill to the Pentagon). Nor would it want to: thanks to its addiction to ballot initiatives, Californian politics is a mess. But it could do more to develop the sort of open, dynamic and creative society that California has epitomised, drawing waves of energetic immigrants not just from other parts of America but from all over the world. Such societies, the ones in which young and enterprising people want to live, cannot be conjured up overnight by a single agent, least of all by government. They are created by the alchemy of artists, entrepreneurs, philanthropists, civic institutions and governments coming together in the right combination at the right moment. And for Australia, economically strong as never before, this is surely such a moment.

Watch our video-guide to Australia's past, present and future, or listen to an interviewwith the author of this Special Report

What then is needed to get the alchemy going? Though government should not seek to direct the chemistry, it should create the conditions for it. That means ensuring that the economy remains open, flexible and resilient, capable, in other words, of getting through harder times when the boom is over (a sovereign-wealth fund would help). It means maintaining a high rate of immigration (which started to fall two years ago). It means, above all, fostering a sense of self-confidence among the people at large to bring about the mix of civic pride, philanthropy and financial investment that so often underpins the success of places like California.

Many Australians do not seem to appreciate that they live in an unusually successful country. Accustomed to unbroken economic expansion—many are too young to remember recession—they are inclined to complain about house prices, 5% unemployment or the problems that a high exchange rate causes manufacturing and several other industries. Some Australians talk big but actually think small, and politicians may be the worst offenders. They are often reluctant to get out in front in policymaking—on climate change, for instance—preferring to follow what bigger countries do. In the quest for a carbon policy, both the main parties have chopped and changed their minds, and their leaders, leaving voters divided and bemused. There can be little doubt that if America could come to a decision on the topic, Australia would soon follow suit.

Its current political leaders, with notable exceptions, are perhaps the least impressive feature of today’s Australia. Just when their country has the chance to become influential in the world, they appear introverted and unable to see the big picture. Little legislation of consequence has been passed since 2003. A labour-market reform introduced by the Liberals was partly repealed by Labor. A proposed tax on the mining companies was badly mishandled (also by Labor), leading to a much feebler one. All attempts at a climate-change bill have failed. The prime minister, Labor’s Julia Gillard, admits she is unmoved by foreign policy. The leader of the opposition, Tony Abbott, takes his cue from America’s tea-party movement, by fighting a carbon tax with a “people’s revolt” in which little is heard apart from personal insults. Instead of pointing to the great benefits of immigration—population growth is responsible for about two-fifths of the increase in real GDP in the past 40 years—the two parties pander shamelessly to xenophobic fears about asylum-seekers washing up in boats.

…or a golden future?

None of this will get Australians to take pride in their achievements and build on them. Better themes for politicians would be their plans to develop first-class universities, nourish the arts, promote urban design and stimulate new industries in anything from alternative energy to desalinating water. All these are under way, but few are surging ahead. Though the country’s best-known building is an opera house, for example, the arts have yet to receive as much official patronage as they deserve. However, the most useful policy to pursue would be education, especially tertiary education. Australia’s universities, like its wine, are decent and dependable, but seldom excellent. Yet educated workers are essential for an economy competitive in services as well as minerals. First, however, Aussies need a bit more self-belief. After that perhaps will come the zest and confidence of an Antipodean California.

No worries?

With two decades of unbroken growth behind it, record prices for its minerals and an insatiable market on its doorstep, Australia can afford to be carefree. Or can it, asks John Grimond?

May 26th 2011 | from the print edition

HAPPY THE COUNTRY that never makes the front pages of foreign newspapers. Australia is one such. Only a dozen economies are bigger, and only six nations are richer—of which Switzerland alone has even a third as many people. Australia is rich, tranquil and mostly overlooked, yet it has a story to tell. Its current prosperity was far from inevitable. Twenty-five years ago Paul Keating, the country’s treasurer (finance minister), declared that if Australia failed to reform it would become a banana republic. Barely five years later, after a nasty recession, the country began a period of uninterrupted economic expansion matched by no other rich country. It continues to this day. This special report will explain how this has come about and ask whether it can last.

Those with a passing acquaintance of Australia will attribute its success to its luck in having such an abundance of minerals that its booming Asian neighbours want to buy. That is certainly part of the story. Yet Australia was not dragged down when a financial crisis struck Asia in 1997. And commodity exports have not always been fashionable. In the 1990s many thought they were evidence of an incorrigibly “old”, low-tech economy doomed to decline. Australia’s terms of trade—the ratio of its export prices to its import prices—seemed stuck at unfavourably low levels. Not until 2003 did minerals begin to boom again, though by then Australia had escaped both the Asian crisis and the recession that hit America in 2001. Five years later came the GFC, Oz-speak for global financial crisis. Yet that, too, failed to drive Australia into recession. Someone, other than Lady Luck, must have been doing something right.

In this latest crisis Australia certainly played its cards well, but the pack had already been nicely shuffled. Over a period of 20 years, from 1983 to 2003, governments of the left and of the right carried out the reforms that have made Australia one of the most open and flexible economies in the world. That description would not have accurately described the country at any other stage in its history.

The incoming government in 1983 led by Bob Hawke, a former trade unionist, was the first to take serious remedial action. With the popular, politically astute Mr Hawke presiding, and the coruscating, aggressive Mr Keating doing most of the pushing, this Labor government floated the Australian dollar, deregulated the financial system, abolished import quotas and cut tariffs. The reforms were continued by Mr Keating when he took over as prime minister in 1991, and then by the Liberal-led (which in Australia means conservative-led) coalition government of John Howard and his treasurer, Peter Costello, after 1996.

By 2003 the effective rate of protection in manufacturing had fallen from about 35% in the 1970s to 5%. Foreign banks had been allowed to compete. Airlines, shipping and telecoms had been deregulated. The labour market had been largely freed, with centralised wage-fixing replaced by enterprise bargaining. State-owned firms had been privatised. A capital-gains tax and a valued-added tax had been brought in, and the double taxation of dividends ended. Corporate and income taxes had both been cut.

These reforms have done much more to transform the Australian economy than the recent improvement in the terms of trade. They have also transformed the country.

Constitutionally, they have destroyed the “Australian settlement”—a semi-tacit compact dating from the time of federation in which the market was tamed by trade protection, centralised wage-setting, a “white Australia” immigration policy and a paternalist state within a benevolent British empire. Most of this has now gone, leaving the way open for centralising federal governments in Canberra, aided by the growth of a national market in everything from advertising to Vegemite, to erode the powers of the states and their control of public money. For their part, some states are challenging the equalising allocation of value-added tax revenues. Republicans have sought to get rid of the monarchy, an imperial comfort blanket in 1901 that seems irrelevant to many in 2011. Aborigines, whose very existence was legally ignored by the European settlers, have fought for land, equal treatment and an apology for two centuries of injustice; now they want recognition in the constitution.

Demographically, by freeing the labour market and operating a colour-blind immigration policy, the reforms have created an increasingly cosmopolitan society. In the 1940s Australia was about 98% Anglo-Celtic; by the 1980s a few other Europeans, mostly Italians and Greeks, and latterly some Vietnamese, had started to leaven the mix. Today over a quarter of the population were born abroad, and most migrants, if they are not from New Zealand or Britain, are from India, China or some other Asian country. Asians make up about 10% of the population.

Psychologically, the reforms have changed what seemed to be a defining feature of Australians’ national character: the happy-go-lucky belief that, though their country more than others might be a victim of external events, something would always turn up. Micawberism has been replaced by a realisation that Australians, like everyone else, have to be resilient, competitive and ready to take charge of their own destinies.

It is tempting to say the reforms have gone further, bringing to Australians a clarity of self-perception not always present in the past. Australians used to see themselves as sturdy pioneers, clearing the bush, rounding up sheep and doing battle with droughts, dingos and dastardly oppressors like the policemen who hunted poor Ned Kelly (never mind that he was a hostage-taker and murderer). But though their heart lay in the outback, the rest of their body was, at least from the mid-19th century, firmly in the city or, more exactly, in the suburbs, which is where most live today.

It would be asking a bit much to expect Australians to weave a new national myth around a suburban life involving barbecues, SSB (sémillon sauvignon blanc), heroes driving Holden utes (General Motors utility vehicles) and characters from “Neighbours”, a sunshine soap. Nonetheless, this era of prosperity and self-confidence should be a good time for Australians to take stock and confront any problems. On the face of it, their troubles are few: in 20 years of radical change all the obvious economic issues have been dealt with. Things are good, and the beach beckons. Certainly, the politicians seem unworried. Though they talk of reform, they spend most of their time scrapping about issues like climate change. A slight whiff of complacency pervades the groves of the capital, Canberra. That in itself should be a warning.

Watch our video-guide to Australia's past, present and future, or listen to an interviewwith the author of this Special Report